Why the Diamond Business Is in a Funk

June 29, 2012byRob Bates

Just about everyone in the diamond industry has seen the chart that lays out the long-term supply demand equation: It shows that, with supply stagnant, and demand steadily increasing, diamond prices will go up in the long-term. When I was in Vegas, I saw three presentations with that chart.

But what happens when demand unexpectedly stalls? We’re seeing that now, and it’s not pretty, as evidenced by all the articles that describe the business as in a “difficult patch” or “a state of despair.”

India is currently the big issue. The incredible devaluation of the rupee has not only impacted the domestic market for jewelry, but the manufacturing sector as well. The new rules against “round-tripping” have also taken a toll. Plus, there are big delays at GIA India—turnaround time is 37 to 42 days, according to its website—which is tying up a lot of dealers’ inventory. And India has become such a dominant player that anything that impacts the market there, hurts the rest of the industry.

China is sputtering a bit as well, as evidenced by the lackluster demand at the Hong Kong show. As far as major markets, only America is considered to be holding steady, although it is far from roaring ahead.

As a result, prices fell 3 percent at the BHP tender and, I hear, at the latest e-auction at Diamdel. At the last DTC sight, some sightholders declined their goods. And De Beers has basically said, that’s okay, indicating it wants to hold the line on prices. Even so, some feel that prices will eventually have to come down. (De Beers has pointed to rising Diamdel prices to justify price increases. So what happens when those prices head down?) And so clients figure, why buy now, when the prices will be cheaper in a month or two? But it’s a gamble—on everyone’s part.

Back in the old days, DTC clients would often take unprofitable goods, with the hope that they would be “rewarded” with extremely profitable “specials” (larger stones) down the line. But that system has largely broken down. At some point, De Beers and its clients may have to arrive at a new equilibrium.

Long-term, of course, the fundamentals of the market remain strong. China and India will come back, as will the United States. But short-term, the market is in a substantial funk. This type of volatility may be just a part of the new world we are living in, and we may all just have to get used to it.